This Chicken Stock Has a Lot of Pluck

By David Englander

SINCE OUR FAVORABLE Alert on (ticker: SAFM) in August, the company has released record earnings and hiked its dividend 7%. Yet the shares, which closed yesterday at $37.17, have fallen 7%; the Dow Jones Total Stock Market index is up 7% over the same period.

We still think this chicken stock has a lot of pluck. The shares could rise to $52 in a year.

Sanderson, the fourth-largest producer in the U.S., is the only pure play in chicken processing. The company produces, processes, and distributes fresh and frozen chickens. Last year Sanderson processed 390 million chickens. The company sells through retail and wholesale channels and also produces prepared foods for the institutional market—mainly restaurants.

A decline in the price of the other white meat—pork—has put pressure on chicken demand in what is traditionally a weak season for chicken. (Chicken sales typically fall off after Labor Day, as cookout season winds down.) Farha Aslam, who covers Sanderson for Stephens Inc., estimates that chicken pricing will fall to 61 cents a pound in January, from 65 cents now. But she expects demand to snap back in the spring. Seasonality and increased demand from food-service customers, she says, will push the price back up to 67 cents in the April quarter.

In the meantime, continued weakness in feed prices will help push up profitability. Corn, which accounts for two-thirds of feed costs, has fallen 29% from a year ago. Feed costs could drop lower next year thanks to this year’s large corn harvest.

Sanderson is expected to earn $83 million or $4.03 a share, on sales of $1.7 billion, in the fiscal year that ends this month. That’s up from a loss of 54 cents last year. In FY 2010, EPS are expected to rise 15%, to $4.63. At their current price, the shares trade at 8 times next year’s earnings estimates.

Sanderson continues to leverage its strong balance sheet to grow at a time when competitors are cutting back. In the July quarter, the company began ramping up production in its existing plants; in September construction began on a new processing facility. These moves will likely pay off next year when chicken prices rebound. We expect the shares to pay off as well.

Fleming Meeks is executive editor of Barron’s and the founding editor of Barron’s Daily Stock Alert. He previously served as editor of SmartMoney, The Wall Street Journal Magazine, and assistant managing editor of Barron’s. Meeks began his career in journalism 25 years ago as a staff writer for Forbes. He holds a B.A. degree from Windham College.If you have comments or questions, please contact him at fleming.meeks@barrons.com

David Englander is a staff writer for the Barron’s Daily Stock Alert. He joined in 2008 as a reporter. Prior to Barron’s, he worked as a consultant, advising Fortune 500 companies on growth strategies and mergers and acquisitions. He has also worked as an independent equity analyst. Englander holds a B.A. from Amherst College, an M.B.A. from the University of Rochester and an M.F.A. from Columbia University.If you have comments or questions, please contact him at david.englander@barrons.com

Alexander Eule has been a staff writer for Barron’s Daily Stock Alert since 2010 and a reporter for Barrons.com since 2006. Prior to the Stock Alert, Eule wrote the site’s Barron’s Take and Weekday Trader features, offering frequent insights into individual stocks and the broad market. He holds a B.A. from Columbia College and an M.S. in Journalism from Columbia University.If you have comments or questions, please contact him at alexander.eule@barrons.com